Reducing Risk in the Sheep Business

By Ross McSwain

November 2004 -- The U. S. Department of Agriculture?s (USDA) Risk Management Agency (RMA) announced recently that sales of Livestock Risk Protection insurance policies would resume on Oct. 1. Sheep industry representatives hope that a similar plan for lambs will be added to the program by the end of the year.

Dr. Peter Griffin, an economist with Applied Analytics Group Inc. of Chicago, says the sheep program would be submitted to the government?s risk management agency for its approval by early October, and it would take about two months for the review process to be completed.

?The program could be approved as early as January, and it would take an additional three to six months to be implemented,? he said.

According to Griffin, who has been working on livestock risk management programs since 1999, the program for swine was initiated in 2002 and the cattle program was started in 2003. However, the sale of LRP feeder cattle and fed cattle was suspended on Dec. 23, 2003 when a bovine spongiform encephalopathy (BSE) case was detected in the state of Washington.

?There had been a lot of (cattle) insurance sold when the BSE case was discovered and the government got nervous and suspended it. It is just now being restarted,? Griffin noted.

Unlike the cattle and swine industries, which have options contracts available for price comparisons at the Chicago Mercantile Exchange, lamb producers do not, thus an extensive price index for lamb had to be developed, Griffin said.

Dr. Wayne Purcell of Virginia Tech, an economist-consultant to USDA, and a graduate student developed a lamb price prediction model which would allow slaughter-lamb prices to be forecast every three, six, nine and 12 months. 

?I?m very excited about this (project),? Purcell said. ?It has a good chance to do some good for producers.? Purcell is due to retire from teaching at Virginia Tech next year, but he says he will continue to work on the lamb pricing schedule through its implementation.

The U.S. sheep industry has been working for years to find ways for producers to improve their marketing systems. Sheep production is risky business and thus far there have been very few tools for managing production available to producers. The ability to manage price risk should provide for increased investment in the sheep business. Increased investment is important to fulfill the goal of a strong and stable sheep industry.

David Bossman, president of the American Feed Industry Association with headquarters in Arlington, Va., said he believes the proposal that will go to the USDA?s Risk Management Agency for approval should provide a sheep industry insurance program within a year.

?If we can get an insurance product on the market by a year from now (October 2005) we will be successful,? he said, noting that the various review processes required could take many months to move through government channels.

Bossman and Griffin are not strangers to risk management programs. Both had roles in the development of similar products for the cattle and swine industries.

Basically, the proposal being made to the USDA-RMA is simply a program to insure lamb prices against future declines. The insurance program was developed through a grant that ASI obtained from the National Sheep Industry Improvement Center. The insurance program will be based on a lamb-price index based on regional lamb prices that had to be developed by Griffin and Purcell.

Bossman said he is satisfied with the program, and is ready to help direct it through the implementation process.

DA Harrell of Fort Stockton, Texas, a rancher who participated in a focus group set up to help specify the features of the program, such as policy size, class of livestock, deductibles and coverage length, said he believes the program will be most beneficial to sheep producers.

?It should make a lot of difference in being profitable and staying in business,? he said. ?It is an attractive program and is cost acceptable.?

?Managing price volatility of lambs is a real need in the sheep industry ? the industry currently has very few tools available for managing risk,? adds American Sheep Industry Association (ASI) Executive Board member and Idaho sheep producer Margaret Soulen-Hinson, who has served as a key point person on the LRP-Lamb project.